Understanding the return on investment definition is essential for making informed investment decisions in the world of crypto. Get to know what this term means by checking out the explanation below!
What Is “Return On Investment”?
Return on investment (ROI) is a key metric used to measure the profitability of an investment. It refers to the amount of profit or loss one realizes compared to the initial amount spent on a crypto asset.
What You Need To Know About “Return On Investment”
The return on investment metric can be expressed as either an absolute ratio, such as 0.25, or as a percentage, such as 25%. This versatility makes ROI not only a straightforward way of evaluating the profitability of a single investment but also a useful tool for comparing multiple trading operations.
The formula for calculating return on investment is:
ROI = (Current Value – Total Cost) / Total Cost x 100
Where:
- Current Value is the current market price of an asset or portfolio
- Total Cost is the initial amount of money invested in an asset or portfolio
For example, if an investor invests $1000 in a cryptocurrency and the current market value is $1500, the return on investment would be calculated as:
ROI = ($1500 – $1000) / $1000 x 100 = 50%
Alternatively, you can also use the following formula:
ROI = Net Profit / Net Cost
A high return on investment value indicates a successful investment, while a negative ROI means that the profit was lower than the costs incurred.
It is important to note that although ROI is a powerful tool for assessing the performance of an investment, it does not take into account its time frame. This means that in certain circumstances, a deal that appears more profitable may actually be less efficient due to a longer investment period.
For instance, if a trade has a 90% ROI but took 12 months to occur, it would be less efficient than a second trade with a 70% ROI that took only 6 months.
